Labor Outsourcing Reform in Mexico

Federal Tax Code

1. Prohibition to Deduct Outsourcing or Subcontracting Expenses

Companies that execute illegal “outsourcing” or “subcontracting” agreements and make payments shall not make deductible said expenses. As noted, the specialized services shall not relate to the corporate purpose and the principal economic activity of the beneficiary.

2. Companies within the Same Business Group

Complementary or shared services or works rendered between companies of the same business group will be considered as specialized as long as the service does not form part of the beneficiary’s corporate purpose or main economic activity.

3. Withholding Taxes from Employees

The legal entities or individuals that benefit from specialized services or works will be jointly liable for the withholding taxes applicable to the involved workers.   

4. Recurrence or Repetition of Unlawful Conduct

When a company has deducted or credited amounts related to illegal outsourcing or subcontracting services two times or more, the Federal Tax Codes provides the recurrence or repetition of unlawful conduct. The Law now considers such conduct as an aggravating circumstance for purposes of imposing fines. 

5. Tax Fraud: Simulation of Rendering Services or Specialized Works.

The Federal Tax Code establishes that using simulated schemes for the rendering of specialized services constitutes an aggravating element in the commission of tax fraud crime.

6. New Tax Infringement and Fine

In the event that the contractor does not provide the necessary information to the beneficiary for the expense to be deductible and VAT creditable, the reform includes a sanction.

Income Tax Law

1. Requirements to Deduct Payments for Specialized Services.

The Law conditions the deduction of payments for the rendering of specialized services or the execution of specialized works. For this purpose, the beneficiary must obtain certain information from the contractor and, in turn, the contractor will be obliged to deliver a copy of the following documents:

• The current registration issued by the Ministry of Labor.

• The invoices relating to the worker’s salaries of the employees that performed the service or work.

• Bank notices and receipts relating to the withholding tax payment applicable to the employees that performed the service or work.

• Social-security tax payments made to the Mexican Social Security Institute (IMSS) and National Workers’ Housing Fund Institute (INFONAVIT).

 2. Non-deductibility of payments for subcontracting of personnel.

In accordance with the changes to the Federal Tax Code, the Income Tax Law specifies that payments corresponding to the outsourcing or subcontracting of personnel are not deductible.

Value Added Tax Law

1. The Obligation to Withhold VAT on Certain Services is Eliminated.

Given that outsourcing and subcontracting of personnel is prohibited, the withholding requirement for subcontracting of personnel services was eliminated.

2. Subcontracting: Non-creditable for VAT purposes.

As noted above, subcontracting of personnel and labor outsourcing payments have no tax effect. Therefore, VAT Law provides that the VAT transferred to a taxpayer for the “subcontracting of personnel” is not creditable.

3. Requirements for Creditable VAT 

The law provides that VAT transferred to the beneficiary of specialized services is creditable when the following requirements are met:

• The Beneficiary shall obtain from the contractor the following:  (1) the contractor’s registration as a specialized service provider before the Ministry of Labor, (2) the contractor’s value-added tax returns or notices, (3) and proof of VAT payment during the period the service was provided.

• The contractor shall provide a copy of the aforementioned documentation to the beneficiary, which has to be delivered within the following month after payment was made.

Regardless of the remarks above, we suggest that a company has to review the Labor Outsourcing Reform in its entirety to identify other potentially relevant issues.